The Q3 earnings season for banking stocks will commence tomorrow with some of the major banks coming up with their earnings releases. While the industry backdrop has remained challenging since the beginning of 2016, banks managed to record a decent performance in the first two quarters. The upcoming results are not expected to be disappointing either.
Banks’ trading revenues are likely to rise on the back of strength in fixed income and currencies. However, equity trading is likely to remain lackluster. Further, mortgage banking income is projected to improve marginally during the quarter.
However, margin pressure will continue to hurt revenues, as the Fed maintained its dovish stance. Also, a substantial rebound in advisory and investment banking fees is not expected.
While energy sector loans still remain a concern, the provision requirement should not be as high as it was in the first half of 2016, thanks to the recovery in oil prices. Further, expense control initiatives are likely to continue supporting the bottom line.
Notably, per our latest Earnings Outlook report, overall earnings for the Finance sector, of which banks constitute a major part, in third-quarter 2016 are expected to rise 4% year over year.
Thus, there might be a surprise in store for major banking stocks this earnings season despite a tepid scenario. Let’s take a look at the four major banks scheduled to release their results tomorrow.
JPMorgan Chase & Co. (NYSE:JPM) will kick off the third-quarter earnings season for the banking sector. It is unlikely to beat the Zacks Consensus Estimate in the to-be-reported quarter as persistently low interest rate environment, along with lower commercial and industrial loan growth, are expected to hamper bottom-line growth in the quarter.
Nonetheless, the company is anticipated to benefit from its mortgage business as it seems that the low rate environment could have pushed people to refinance home loans. Further, the provision requirement for energy sector loans should not be as high. (Read more: Why Q3 Earnings Could Pull JPMorgan Stock Lower)
Notably, this stock surpassed the Zacks Consensus Estimate in three of the trailing four quarters. It carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Another big bank, Citigroup Inc. (NYSE:C) , is also not likely to surpass the Zacks Consensus Estimate in the third quarter as expenses are expected to trend higher. Further, margin pressure will continue.
However, this Zacks Rank #3 (Hold) stock should witness improvement in trading income and consumer banking revenues. Moreover, the Costco (NASDAQ:COST) acquisition will support its top line to some extent. (Read more: Citigroup Q3 Earnings: What's in Store for the Stock?)
Nonetheless, Citigroup surpassed the Zacks Consensus Estimate in the trailing four quarters, as shown in the chart below:
Wells Fargo & Company (NYSE:WFC) , similar to the above two banks, is less likely to beat the Zacks Consensus Estimate this time around. Continued margin pressure and mounting expenses are expected to hurt the results.
Nevertheless, the bank should benefit from momentum in mortgage business. Management expects mortgage origination volume to increase in the third quarter, reflecting normal seasonality and strength in the housing sector as well as mortgage banking segment. (Read more: Will Q3 Earnings Pull Wells Fargo Stock Down Further?)
This Zacks Rank #3 stock has posted a positive average beat of 0.5% for the trailing four quarters, having beaten the Zacks Consensus Estimate in three of them, as demonstrated in the chart below:
WELLS FARGO-NEW Price and EPS Surprise
WELLS FARGO-NEW Price and EPS Surprise | WELLS FARGO-NEW Quote
The PNC Financial Services Group, Inc. (NYSE:PNC) is also unlikely to beat the Zacks Consensus Estimate in the third quarter. Nevertheless, stable net interest income and fee income are anticipated to drive top-line growth.
However, constant pressure on net interest margin and seasonally higher expenses are potential headwinds for this Zacks Rank #3 (Hold) stock. (Read more: Will PNC Financial Miss on Q3 Earnings Estimates?)
PNC Financial has posted a positive average beat of 3.5% for the trailing four quarters, having beaten the Zacks Consensus Estimate in three of them, as demonstrated in the chart below:
PNC FINL SVC CP Price and EPS Surprise
PNC FINL SVC CP Price and EPS Surprise | PNC FINL SVC CP Quote
Given tough industry challenges faced by major banks, investors should focus on the companies’ fundamentals, regardless of an earnings beat or miss.
Check later our full write-up on earnings releases of these stocks.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>
JPMORGAN CHASE (JPM): Free Stock Analysis Report
PNC FINL SVC CP (PNC): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
Original post
Zacks Investment Research